If you check the RS part number for that encoder on RS, it is only a 500 ppr encoder.
I've just tried finding an official spec for suitable encoders, and although I've found it has to be a 5V differential output encoder, all they say is they recommend 2000ppr, not what the actual minimum or maximum possible is.

Chaz, what ppr is your encoder?
And do you know what limits they put on the appropriate setting in the software?


2000 is high for a spindle encoder on a controller aimed more at the hobby/light industrial end of the market. I've got an old mill that has a 200 line spindle encoder, and it would of been able to rigid tap using it's original controller, which is far more demanding on accuracy than single point threading on a lathe.
For a lathe, even a 50 line encoder would be more than adequate for most reasonable sized threads. I can guess why Centroid recommend such a high count, but that's just because I'm a bit of a geek.

If you're existing encoder is differential output with all the required outputs (A,B, Z, plus their compliments - should have at least an 8 core cable if it is), I'd be inclined to wire it in and try it. Worst case you have to change it, best case you get a functioning spindle encoder that does the job without having to change anything.